Interest rates are the most important economic influence on our economy; they reflect the value of money. Entities with excess money become lenders. Borrowers, such as hospitals or larger healthcare systems, exchange money from lenders based on this interest rate. During times of normal interest rates these rates include a premium based on the creditworthiness of the borrower, which is known as the risk premium.
In the past decade we have seen record low interest rates as central banks have used monetary policy to stimulate their economies. Most recently, and for the first time in history, some central banks have been using negative interest rates with the hopes of stimulating supply of money and economic activity.
In low interest rate environments there are significant economic risks including:
- Hurting pensioners who are dependent on interest from savings
- Encouraging speculative activities as there is cheap access to money
- Indiscriminate lending by insurance companies, pensioners, and institutional investors who need income (aka “reach for yield”) and ignore risk premium
- Increased assumption of debt by hospitals, firms, and governments
The last three items are important as we consider the economic health of the hospitals or radiology departments in which many of us work.
In an article on the debt crisis rolling from the real estate industry into other markets, The Economist notes, “there is plenty of evidence to suggest that rapid debt build-ups are the hallmarks of periods of indiscriminate lending that eventually end in tears.” Should interest rates start to rise, rates of risky loans are likely to increase disproportionally as lenders become more discriminating thereby adding higher risk premiums on top of the already higher interest rates. Hospitals with debts that must be refinanced in the next few years may find themselves in a difficult position.
Furthermore increasing government regulation, uncertainty with the Accountable Care Act, or decreasing revenue from MACRA add to any pain of future interest rate increases as these additional burdens reduce operating revenue. Warren Buffet encapsulates this difficult dynamic when he states, “When the tide goes out you can tell who’s been skinny dipping.” The tide is already receding in our rural hospitals were 700 may be at risk for closing.
On a national scale, in an uniquely American Shakespearean tragedy, one of our largest for profit hospital networks swallowed “a poison pill” as they struggle to refinance $2.2B in long-term debt due in 2018. As Community Health Systems struggles to roll their debt forward, they plan on selling up to 25 hospitals two of which have been in Easton and Sharon, Pennsylvania this past February.
Case in Point
A medium-sized medical center in rural New England opened a new hospital in November of 2013, with the help of a $280m bond offering. At the time of the initial sale, these bonds received a middle-to-low investment grade rating from Fitch and Moody’s. The new hospital is aesthetically beautiful with a light-filled, spacious entrance, glass, tile, wood panels and a pagoda garden, featuring a waterfall and fountain. The floor plan is efficient, there are new computers and scanners, and the building is efficient to heat and cool. Yet, the annual cost to service this debt is approximately $20 million per year.
Does $20 million per year buy you an improved business? Certainly the new building is a huge marketing asset. Yet does it help with management, cash flow, accounting, or organizational strategies? Probably not, most of these functions could be performed in a trailer with a dial-up modem.
Does $20 million per year buy you improved financial stability? The short-term trend for this institution is not good. In FY15 the hospital lost $24 million from operations. In 2016 they just broke even.
Does $20 million per year buy improved quality? Apparently not, the length of stay at this hospital has increased 11% over the past 4 years from 4.8 to 5.4 days.
This hospital’s bond rating from Moody’s has dipped two steps below the “junk” threshold. Fitch has a negative outlook on the debt, which signals to investors that further downgrades are possible. When this hospital needs to roll their debt forward they may have to do so at higher rates, further compromising their cash flow and long term sustainability.
Radiology and Radiation Oncology are perhaps the most capital-intensive specialties in medicine. We are dependent on continuous investment in expensive equipment and IT infrastructure. Some debt is normal and can even be healthy. However, too much debt can be an unsustainable burden. The low interest rate environment of the past decade may have created scenarios where our hospitals or healthcare systems have taken on too much debt, risking their ability to deliver medicine into the future. As rates rise (or the proverbial tide recedes), a skinny-dipping hospital administrator is likely to expose him or herself. In the current environment of diminishing reimbursement and increasing regulation, the number of exposed administrators would be an especially gruesome event.
Ultimately, the choice of spending money on debt payments vs. patient care is tricky. From the perspective of a community and physician, there are significant risks to working in a highly indebted hospital. Finding a conservative, well-capitalized hospital in which to work is increasingly difficult.
A basic understanding of the financial and economic forces affecting our hospitals is essential as we plan and manage our careers. We need to be aware of our institution’s amount of debt, bond ratings (if they exist), and interest rate trends to appreciate the relative security and stability of our home institutions. A large amount of debt, or a low credit rating, may be a concern to a young physician choosing a future employer. Working at a veterans’ hospital may be attractive to physicians as the owner is the same organization that prints money. Thus, the parent organization of the Veterans Health Administration retains a nearly perfect credit rating.
 Bankers v mattresses. The Economist; November 28, 2015. http://www.economist.com/news/finance-and-economics/21679231-central-banks-are-still-testing-limits-how-low-interest-rates-can-go-bankers accessed November 30, 2015.
 Kliesen KL, Low Interest Rates Have Benefits… and Costs. Federal Reserve Bank of St. Louis. https://www.stlouisfed.org/publications/inside-the-vault/spring-2011/low-interest-rates-have-benefits-and-costs accessed November 18, 2015.
 Pulled Back In. The Economist; November 14, 2015. http://www.economist.com/news/briefing/21678215-world-entering-third-stage-rolling-debt-crisis-time-centred-emerging accessed November 16, 2015.
 Already troubled, rural hospitasl brace for effects of Obamacare repeal. CNN.com http://www.cnn.com/2017/01/17/health/rural-hospitals-aca-repeal-partner/ accessed February 22, 2017.
 Community Health Systems Adopts Poison Pill. Wall Street Journal https://www.wsj.com/articles/community-health-systems-adopts-poison-pill-1475532170 accessed February 22, 2017.
 CHS Stock Rallies After Chain Meets Guidance, Says It Will Sell a Total of 25 Hospitals, Modernhealthcare.com http://www.modernhealthcare.com/article/20170220/NEWS/170229996 accessed February 22, 2017.
 CHS to Sell 8 Hosptials to Steward Health Care. Beckershospitalreview.com http://www.beckershospitalreview.com/hospital-transactions-and-valuation/chs-to-sell-8-hospitals-to-steward-health-care.html accessed Februrary 22, 2017.
 MaineGeneral Health and Subsidiaries Annual Report http://emma.msrb.org/EP876101-EP678461-EP1080081.pdf accessed November 30, 2015.
 MaineGeneral Health Annual Financial Information for Period Ended June 30, 2016 http://emma.msrb.org/ER999130-ER781677-ER1182905.pdf accessed February 22, 2017.